In: Finance
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LOAN PAYMENTS ARE MADE AT THE END OF EACH MONTH
When Sarah Jean purchased her house 12 years ago, she took out a 30-year mortgage for $220,000. The mortgage has a fixed interest rate of 6 percent compounded monthly.
(a) Compute Sarah Jean’s monthly mortgage payments.
(b) If Sarah Jean wants to pay off her mortgage today, for how much should she write a check? She made her most recent mortgage payment earlier today.
a. | ||||||||
Formula to calculate monthly payment | ||||||||
Monthly payment | Loan amount/Annuity discount factor | |||||||
Annuity discount factor | [1-((1+r)^-n)]/r | |||||||
interest rate is r and number of payments is n | ||||||||
Calculate monthly payment for new car | ||||||||
Monthly interest rate (r ) | 0.005 | 6%/12 | ||||||
No of payments (n) | 360 | 30*12 | ||||||
Monthly payment | 220000/(1-(1.005^-360))/0.005 | |||||||
Monthly payment | 220000/166.7916 | |||||||
Monthly payment | $1,319.01 | |||||||
b. | ||||||||
In this case we will have to calculate present value of monthly payment with 18 years (30 years - 12 years) remaining to pay the loan | ||||||||
Loan amount | Monthly payment*[1-((1+r)^-n)]/r | |||||||
Loan amount | 1319.01*(1-(1.005^-216)/0.005) | |||||||
Loan amount | 1319.01*131.90 | |||||||
Loan amount | $173,974.77 | |||||||
Thus, Sarah will have to pay $173,974.77 if loan is repaid today. | ||||||||